The End of Nation-States?
2018-06-29 · Guest: Dr. Mark Lutter (Center for Innovative Governance Research) · 48:20
Free cities and charter cities for economic development
Bob Zadek interviews Dr. Mark Lutter, Founder and Executive Director of the Center for Innovative Governance Research, about the concept of free cities and charter cities as a mechanism for economic development and poverty alleviation. They discuss historical successes like Singapore and Shenzhen, the political challenges faced in Honduras, and the potential for new governance models in rapidly urbanizing regions like sub-Saharan Africa.
Topics: Free Cities, Charter Cities, Economic Development, Governance, Rule of Law, Special Economic Zones, Poverty Alleviation, Honduras ZEDE, Shenzhen, Singapore, Federalism
Speakers: Bob Zadek: Host Dr. Mark Lutter: Guest
Introduction to Free Cities [00:15]
Bob Zadek: Longest running live libertarian talk radio show on all of radio. I am as always your host, Bob Zadek. Thanks so much for listening. This morning we are going to learn an issue which most libertarians don’t fully appreciate. Libertarians strongly support free minds, free markets, limited government. However, the concept of small or limited government is kind of misleading. Libertarians, especially those who look forward to free markets and economic growth, desperately need strong government in certain respects. We need strong government because without a strong government that enforces a rule of law, enforces contract obligations, creates a way to peaceably resolve disputes, then the free market cannot function. And it is that important link that is the subject of this morning’s talk.
This morning’s talk is “Free Cities.” Now, free cities is an often misunderstood, if not totally not understood, concept. Dr. Mark Lutter is the founder and executive director of the Center for Innovative Governance Research. He has a PhD in economics from George Mason University, and his dissertation, interestingly enough, was on the subject of proprietary cities. This morning we will examine how important it is for governance to be the petri dish in which free markets need in order to survive. Mark, welcome to the show this morning.
Dr. Mark Lutter: Thanks for having me on.
Defining the Free City Concept [02:09]
Bob Zadek: Now, Mark, the subject is in the broadest sense free cities, sometimes called proprietary cities. I think it’s fair to say that our audience may not have been—may not be so familiar with the subject of free cities, proprietary cities, or various incantations of that. Help us understand first the big picture. What are we talking about when we talk about this subject of free cities or proprietary cities?
Dr. Mark Lutter: So a free city is basically just a city that has substantial or complete legal autonomy. And so examples of this in the modern world are Hong Kong, Shenzhen, Dubai, and Singapore. And of course, there are many more examples throughout history in terms of free imperial cities in the Holy Roman Empire, as well as Venice and Genoa, which created the first example of modern republican government.
And so free cities are an important concept because oftentimes it can be very difficult to change government on a national level. And so we see this in the US, but also in other high-income countries as well as low and middle-income countries. And the idea behind the Center for Innovative Governance Research is to develop the ideas surrounding free cities as a mechanism for policy change, because by targeting Greenfield sites that do not have a lot of special interest, it can be possible to implement more substantial policy reforms that can better protect property rights, that can better create a legal environment that’s conducive to investment, that’s conducive to employment, and that’s conducive to economic development. And this can help create the economic freedom that’s necessary for sustained economic growth and poverty alleviation.
Economic Growth and Poverty Alleviation [04:19]
Bob Zadek: Okay, Mark. So now when we think about free cities or proprietary cities, we’re probably thinking about personal freedom. But free cities are far more important than that. Indeed, they are considered to be instruments of economic growth, not necessarily providing maximum personal freedom of the type libertarians tend to focus on. So help us understand how free cities are essential for economic growth and tell us in the big picture the link between functioning free cities, what they are free of, and how that is important for economic growth and to relieve poverty, and then we’ll get into some examples of how effective they have been.
Dr. Mark Lutter: Sure. So a free city is best defined as a city with substantial legal autonomy from a host country or an independent city-state. And modern examples are Singapore, Hong Kong, Dubai, and Shenzhen. And the idea behind a free city is one of political economy. It’s often very difficult to implement national-level reforms. There’s a variety of interest groups and you have to build coalitions that make it challenging to implement the reforms that are necessary to create jobs, to create investment.
However, by creating a free city, especially in land that is relatively unoccupied on a Greenfield site, you can get much deeper reforms than otherwise possible because the special interest groups wouldn’t necessarily have a vested interest in that Greenfield site. And effectively, this is a strategy to implement the reforms that lead to relatively free markets, that lead to a good governance system with little corruption, that can attract the investment and create the jobs necessary for economic development.
And so in terms of examples throughout history, I think one of the most important ones is China. China in 1980 designated Shenzhen a special economic zone. At the time, it was a fishing village of 30,000 residents. Now Shenzhen, depending on how you want to define the metropolitan area, has about 18 million residents. It’s the manufacturing capital of the world and it’s played a crucial role in the economic growth that we have seen in China. And China over the last 40 years or so has lifted about 800 million people out of poverty, largely based on this strategy of zone-based reforms because they would not have been able to pass this legislation, to pass these reforms on a national level. They basically identified some backwaters that were on key trading routes and allowed the reforms to be implemented there. Once those were successful, they spread throughout the country.
And this is important because I think this model can be replicated in other low and middle-income countries, for example, in Africa and in Latin America, to help create the legal environment, the governance system that can generate economic growth and alleviate tremendous amounts of poverty.
The Ecosystem of Innovative Governance [07:31]
Dr. Mark Lutter: And so the Center for Innovative Governance Research, what we focus on as a think tank—we’re relatively new, we launched three months ago—and so we focus on creating the ecosystem within which free cities can be developed. And we see this as containing two important aspects.
So for example, Paul Romer, about nine years ago, he gave a TED talk on charter cities, which is a concept very similar to free cities. Paul Romer is a world-famous economist, he’s probably on the short list for a Nobel Prize. He gives this TED talk, he gets a lot of attention. He has one opportunity in Madagascar to create a charter city, and then he has another opportunity in Honduras to create a charter city. There’s political challenges in both countries that lead to him pulling out and the projects not being successful. And Paul Romer more or less walks away, at least publicly, from the concept of charter cities. And after that, there’s a lot of energy and attention that dies with regards to the subject.
So our goal at the Center for Innovative Governance Research is to develop the set of ideas and develop the ecosystem surrounding free cities, surrounding charter cities, such that it’s not dependent on a single person. Because when it’s dependent on a single person or on a single country, there’s too few points of failure. And if the projects run into any challenges with that person or with that country, it sets back the set of ideas broadly.
And so our goal is to develop some foundational research, to get the ideas out there, such that when entrepreneurs go to approach governments or when new city projects approach financiers, there is this high-level concept such that these groups are able to speak the same language, which allows them to communicate more effectively and be able to implement the projects on a better timeline.
The other thing that’s important, I think, is to bring together the interest groups that are approaching these types of projects from different angles. And there’s several interest groups that can be brought together that I think can have a strong positive impact on the development of free cities around the world. One of these interest groups is Silicon Valley entrepreneurs. I would estimate about 10 to 20 percent of unicorn founders—a unicorn being a billion-dollar company—are interested in building a free city. I’ve had this conversation multiple times where they say, “I’m building up a war chest such that when I have my exit, I can go and build a free city.”
Two, you have economists. Most economists are quite sympathetic to the concept of charter cities. However, they don’t get career points for discussing them. It’s difficult to write published academic papers on charter cities simply because there’s not a lot of data. However, by creating an avenue within which there are opportunities to discuss this idea, there’s a lot of development economists, most of whom are sympathetic, some of whom are critical, but who can help add to the discussion.
You also have the humanitarian community in Europe with high-profile people such as, for example, George Soros and Gordon Brown, who have supported what they usually describe as economic zones for refugees, but which are reasonably similar to the concept of free cities but targeted at refugees because Europe is still straining under the refugee crisis.
Further, you have dozens of these new city projects around the world, which are multi-billion dollar real estate projects. For example, on my podcast, which I’ll be publishing tomorrow, the Innovative Governance Podcast, I had Mwiya Musokotwane, who is building a new city project in Zambia outside of the capital city of Lusaka. And these projects are usually billions of dollars, they have 100,000 residents, and they would clearly benefit greatly by improving governance because their property values would increase.
And so by bringing these groups together, by having these conversations start, we believe that it’s possible to create the ecosystem within which some of these projects are able to take the next steps in terms of getting the legal authority from the potential host country to be able to create a new governance system, as well as to be able to raise the capital necessary for the massive infrastructure investments that are necessary to create a new city or a satellite city.
The Honduras Experiment [11:56]
Bob Zadek: Mark, tell us—this movement has been around for quite some time, and there has been an experiment, an experiment in Honduras, which was the first attempt to have a free city movement be developed and flourish. Tell us why Honduras, what the plan was, and what went wrong, and what have we learned from that?
Dr. Mark Lutter: Sure. So I lived in Honduras for six months about, I think, four years ago now. And I wouldn’t say Honduras is the first attempt, but it’s certainly the most prominent. And what happened in Honduras—there’s different stories depending on who you talk to. The what I would call the most widely accepted story is after Paul Romer’s TED talk, Paul Romer was invited to Honduras to help design legislation that would allow the creation of a free city, or given that Paul Romer was involved, he would probably prefer the term charter city.
And Honduras was just coming out of a semi-coup in 2009 where the president was removed from the military. The president was also violating several constitutional mandates, which is why I describe it as a semi-coup. And Honduras was at the time one of the most dangerous countries in the world, so it was relatively desperate to figure out how to reform the system. The Hondurans, if you talk to them, they were bouncing these ideas around in terms of how to create sustainable reforms that would allow Honduras to transform itself into an upper-middle-income country, while right now the per capita GDP is hovering around $3,000.
And the idea behind the legislation was to allow different projects to propose to the government—there would be a commission created that would then be able to approve these projects. And so it would allow for these experiments to take place. After approximately a year of the legislation—the acronym was RED, I don’t remember what that stands for in Spanish—the Supreme Court voted the RED legislation down. And at around the same time, Paul Romer left the project because he had been getting in fights with the government.
Bob Zadek: And what was the plan? The plan that was voted—the plan that was hoped for that never reached fruition? Give us, just so the audience can hear tangibly, what a free city would have looked like. What made this city special in Honduras, and what was the hope?
Dr. Mark Lutter: Sure. The hope was to create a system of good governance. And so the idea would be Honduras does not rank very good on most governance indicators. So for example, if you look at economic freedom indices or the World Bank Doing Business Index, Honduras is middle-of-the-pack country at best. And the idea would be to basically have a blank slate in commercial law within which a new legal system could be created, and which would allow a much greater investment, which would allow more development in human capital, which would allow job creation to a greater extent than Honduras is currently able to have.
And so as some examples, given that Honduras has a very high degree of violence, there’s also a distrust in a lot of public authorities. For example, when I lived there, I had several of my friends who were middle-class friends, middle-class Hondurans, tell me that they were more afraid of the police than they were of the gangs. And this is the country that at the time was the murder capital of the world, and you have productive people who are more afraid of the police because the police are so corrupt and can act with impunity. And I think that represents challenges that Honduras has among all facets of society and government.
And so the idea behind the free city would be to create a blank slate in governance—not in criminal law, but in commercial law—which would allow the creation or the importation of improved governance systems. And so for example, common law, which is generally regarded as the best legal system for economic development, could be brought in. There could be low taxes, it could be very easy to start and to register a business. And that would allow the flowing in of investment, the creation of jobs, similar to how Dubai in about a 30-year period transformed itself from a strip of desert into a thriving metropolis.
Political Resistance and Entrenched Interests [16:30]
Bob Zadek: So the system was to build a new city from scratch. Were the proponents going to select an existing city and sort of say, “We’re in charge now,” and have that city be somewhat independent of the country in which the city resided? Exactly what was—was it going to be something like a city-state with its own rules? What would have been the relationship between this free city within the geographic boundary of Honduras? What would be its political and economic relationship to the country in which the city sat?
Dr. Mark Lutter: Sure. So under the ZEDE legislation, which is the second legislation that passed in Honduras, the city would have relatively close to a blank slate in commercial law. Criminal law would still apply. The city would pay about 12 percent of tax revenues to the government. The constitution of Honduras would still apply, as well as all international treaties. However, the charter city, the free city, would have effectively complete autonomy in commercial law.
And what that would mean is that they would be able to set up their own judicial system for civil and commercial cases. They would be able to set up their own system for registering a business. They’d be able to set up their own labor regulation. They’d be able to set up their own environmental regulation. They would have a very wide latitude in what it means to create, to implement, and create this legal system which would apply to the residents of the new city.
And it’s important to clarify that this would be a new city. The Honduran legislation allows for areas that have relatively high population densities to vote to join a ZEDE, but they would have to have a democratic vote to make sure that they didn’t feel that their rights were being trampled on. But the most likely outcome is a developer would buy farmland and then develop it into a new city project there.
Bob Zadek: Then here’s my question. If the plan was by the sponsors, if you will, of the plan, “Give us some farmland, relatively unproductive, allow us to do nothing other than set up our own government. We will pay taxes to the host country, Honduras. We hope to create economic development, provide jobs and employment to tax-paying Hondurans. We’re not going to mess with anybody.” And who’s the loser? Why—now you say this failed because it was found to be unconstitutional. Now I’m going to be a bit cynical, and with apologies in advance. Let’s assume it was unconstitutional. Since this offered so much profound benefit, if the Honduran government was sincere in its hope to give this a try, it seems to me they could have overcome that by legislation or whatever. But there had to have been a failure in the political process. It seems to me, as I listen to your narrative, that there was something about it that made those in power just reject the concept. But everybody would win. So what went wrong in the political process that Honduras as a country and political class didn’t just embrace it and make it happen?
Dr. Mark Lutter: So to clarify, they did actually overcome the constitutional barrier. The original legislation was voted unconstitutional by the Supreme Court. Honduras made several constitutional changes and passed similar legislation that was later upheld by the Supreme Court. The ZEDE legislation, which is the second legislation, is still on the books today. However, to my knowledge, no project has yet to be approved.
So what is the failure? I would point to two primary factors. One is there is this concept of national sovereignty. And when I lived in Honduras, most of the pushback I got was regarding this concept of national sovereignty. There were a lot of people who felt that this idea of national sovereignty is sacred, and to give up, even if it doesn’t include the constitution, it doesn’t include criminal law, it doesn’t include international treaties, to give up commercial law violates this concept of national sovereignty and isn’t something that’s really feasible just from this sort of basic idea of nation-state. And there was a lot of pushback along those lines.
A second important aspect, I don’t think the project was publicly framed in the right manner. I don’t think the discussion was in the right manner. And so if you look, for example, the Committee for the Adoption of Best Practices has been—most of the appointees were people who identify strongly as libertarians and identify strongly with the political right. And I think by branding the project as a libertarian project, it sort of set off alarm bells in a lot of people on the left because they naturally oppose anything that’s associated with libertarianism or conservatism.
And I don’t see these projects as particularly libertarian. I think there are a lot of people on the center-left who have—agree with these sort of high-minded principles regarding rule of law, regarding property rights, regarding the ease of doing business. And so for example, Hillary Clinton, during her presidential campaign—well, she didn’t come out and say it, but it leaked, I think it was a speech to bankers where she mentioned that she wanted open borders and free trade in the Western Hemisphere. And so I think at least amongst a reasonable percentage of people on the center-left, there is this broad idea that markets work. I think that they value regulation a lot more highly than somebody like myself would, but there is this agreement that markets are generally a good tool for poverty alleviation. However, they weren’t brought on as allies to this project, which is I believe partially a result from the sort of failure to position the project publicly in a manner that would be beneficial.
I think the third aspect that’s important to consider—you say that there would be no losers. I think that there would be a few losers to a project like this, which would effectively be the monopolists in Honduras who would see, for example, lower-cost banking companies come in and provide banking services more effectively, or lower-cost manufacturing come in and be able to manufacture goods more effectively. And this is sort of the classic challenge with any type of reform, is that there’s going to be one group or maybe more than one group that has an existing set of rents based on the existing system, where if you come up with reforms that liberalize the market, that liberalize trade, there’s going to be a new competitor to that group that has this set of rents that allows them to basically live without innovating and live just because they have this business set up, even though there could be a more competitive business that’s currently legally banned.
And a free city or charter city would, not in the short term but in the medium or long term, effectively challenge some of those established interests, which would cause them to lose on some profits that are currently effectively guaranteed by the host country. And so I imagine that some of the opposition is based on pure self-interest that realizes that this would effectively create an avenue for economic development that might leave these families and these groups outside and cause them to become less competitive because the free market encourages new entrants into the market.
Bob Zadek: This is Bob Zadek. I’m speaking with Dr. Mark Lutter. He’s the founder and executive director of the Center for Innovative Governance Research. Mark is a strong proponent of proprietary cities, free cities. Mark will tell us, when we come back from break, some astonishing success stories. All it takes is the incubator and the petri dish of free markets, rule of law, honoring contracts, a judicial system that enforces contracts. All it takes and the prospects for growth are unlimited, irrespective of the country in which the project starts. We’ll be back in one short minute. Please stay tuned.
[Sponsor break removed]
The Need for Effective Government [26:24]
Bob Zadek: Welcome back to the Bob Zadek Show, the longest running live libertarian talk radio show on all of radio. I am as always your host, Bob Zadek. Thanks so much for listening. We are strictly the show of content, not soundbites. Just substance, that’s what we enjoy. This morning I’m happy to welcome back to the show Dr. Mark Lutter. Mark is the founder and executive director of the Center for Innovative Governance Research. He holds a PhD from George Mason University. He studied under Don Boudreaux, an often guest on our show.
And Mark has been proposing and seeking to educate people on the profound, dramatic, almost immediate economic benefits of nothing other than rule of law, a common law system, the ability to enforce contracts, and honest government. With those modest ingredients, economic growth is almost unlimited. And the important lesson you will learn from Mark this morning is that libertarians don’t simply want less government. That’s only part of the equation. What of course we desperately need, desperately want, is effective government. There are certain areas when without government—and that’s the topic of this morning’s show—without effective government, economic growth is almost impossible.
And Mark will explain to us miracles in the Far East, in China, which economic miracles could not have taken place without the creation of free cities. And with the creation of free cities—and Mark will explain what I mean by free cities—with the creation of free cities, the economic growth boggles the imagination. Mark, wow the audience with stories of the actual success of the free city movement.
Historical Success Stories: Singapore, Hong Kong, and Shenzhen [28:41]
Dr. Mark Lutter: Sure. Well, just to clarify, I wouldn’t call these successes of the free cities movement per se. I think these are successes of free cities. But for example, looking at Hong Kong, China, and Hong Kong, Shenzhen, and Singapore show that on a city level, if you have rule of law, if you have property rights, and if it is relatively easy to do business and enforce contracts, it’s possible to grow from a backwater into a thriving metropolis in a matter of two or three generations.
Singapore, for example, it holds the glorious distinction as being the only country in the world that exists because it was kicked out of a union. When it gained independence from Britain in, I believe it was 1961, it joined Malaysia. And a few years later, Malaysia kicked them out because Singapore is majority Chinese while Malaysia is majority Malay. And at the time they got kicked out, their per capita income was hovering around $1,000 per year. There were ethnic riots every few years because it had this mix of Malays, of Chinese, as well as of Indians. And there was almost nobody gave them any hope for becoming successful.
And now Singapore is one of the wealthiest countries in the world. They have one of the—they’re one of the finance leaders in the world. And this was—they were successful because they were able to create—and I think you touched on this important point—that not only are markets essential, but also this idea of having an effective government. And so I was recently been reading Lee Kuan Yew’s biography. Lee Kuan Yew being the first Prime Minister of Singapore who was largely considered responsible for its economic success. And the first few chapters he devotes not to building markets, but to building the government, to making sure the government is able to protect the citizens, to make sure the government is able to prevent large-scale riots and large-scale civil strife from happening. And after that, he focuses on creating a market within which entrepreneurs can invest, entrepreneurs can be successful, and capital can be attracted overseas.
Hong Kong has a somewhat similar story because as a British colony, it had the common law system. And so looking at Hong Kong, they had John Cowperthwaite. He was a leader in Hong Kong, a British appointee, and he was a classical liberal and basically had this policy that was called positive non-interventionism, which effectively allowed the people in Hong Kong to live their lives as they saw fit. And with that, Hong Kong was able to rise to become a tremendous success and become one of the leading manufacturing and then financial centers in Asia.
Hong Kong further, along to a certain extent with Singapore, inspired China to implement this policy of special economic zone reforms. And China over the last 40 or so years has been the greatest humanitarian miracle since World War II. They’ve lifted approximately 800 people—800 million people out of poverty, according to the World Bank. And what happened was China to a certain extent saw the success of Hong Kong and saw the success of Singapore and thought, “Okay, if these basically Chinese-led cities can be successful, then why are we still so mired in poverty?” And they created four special economic zones in 1980, the most prominent being Shenzhen. At the time, Shenzhen was a fishing village of 30,000 people. The first year of its existence as a special economic zone…
Special Economic Zones as Policy Labs [33:47]
Bob Zadek: Mark, tell us about—Mark, just to—I hate to interrupt, but tell us what you mean by special economic zone. What makes that different? What makes that, if you will, special?
Dr. Mark Lutter: Sure. A special economic zone can be thought of as a territory within which some of the national-level laws and regulations, business laws and regulations, do not apply. And so with—there’s a lot of examples of this around the world. Most of them have lower taxes, some of them make it easier to export and import. What made Shenzhen special were several things. One, foreign direct investment was legal. In the rest of China at the time, foreign direct investment was illegal. Two, Shenzhen had a unique labor policy. And so it allowed for a more efficient, or not even more efficient, for simply a market in labor to exist, where at the time China, because it was a communist country, there was no market in labor.
And over time, they implemented several more reforms that allowed them to attract more capital and to develop more successfully. And these reforms were unique to them, that were not being applied to the rest of China. So a special economic zone is simply an area of a country within which the national-level business laws and regulations do not apply.
Bob Zadek: Now the question, Mark, that has to occur to our audience is, why not make all of China, why not make all of the US, one big special economic zone if that’s the secret to success? Why make it special? Why not just make it regular?
Dr. Mark Lutter: Well, that’s what ended up happening in China. After Shenzhen was successful, special economic zones spread until now most of the country has this special set of rules. In general, it would be better to implement most of these changes on a national level. There is, I think, a broad consensus of what works in terms of promoting economic development, which is rule of law, property rights, and a relatively open business environment. And these things would be better to implement on a national level.
However, oftentimes politically it can be very difficult to implement them on a national level. And so a special economic zone or a free city or charter city is a second-best solution that might be more possible in the real world. The other thing to consider is that sometimes you want to test a policy out before implementing it on a nationwide level. So if there’s a policy that you think is a good idea but you’re not sure, you might decide to test it out in an area. If it’s successful there, then you can expand it to the rest of the country. But if it’s unsuccessful there, then the negative consequences of that policy test would be relatively limited. And so you can think, for example, of let’s say self-driving cars. It might make sense to have an area of the country where you’re testing self-driving cars before you roll them out to the rest of the country, because there’s the possibility that if the self-driving cars are not sufficiently developed, they could lead to more accidents, at least in the short term. And so to limit that possibility, simply test them in part of the country before making sure that they’re safe enough to roll out to the rest of the country.
Urbanization in Africa and the Future of Free Cities [38:58]
Bob Zadek: My audience is savvy enough to immediately leap to the conclusion that what you are talking about, or what your presentation is, it’s kind of an ode to federalism. Just as Brandeis observed that our federalist system of co-equal governments at the state and federal level, that the states were incubators of democracy. They were the place where one state could experiment; if something worked, other states would adopt it; if something didn’t work, that state and other states would reject it. And that’s what makes federalism such an interesting political system. And you’re describing federalism in exactly that concept, except not at the state level but at the city level. Try an idea, see if it works; if it works, it’ll spread because it’s a good idea. And so is this not nothing other than a strong, profound reaffirmation of federalism?
Dr. Mark Lutter: Sure. I certainly think that’s one way to interpret this. There are some policies that you want to be done on the national level. For example, national defense is obviously more efficient to do at a national level. But there’s a lot of other types of policies that you want to be done on a more local level, whether that level is the state or the city government, because they might be more responsive to the needs of the citizen.
But if it’s possible to change gears a little bit, I think to me the most exciting area of charter cities, of free cities, is probably in Africa as well as parts of Asia, because these places are urbanizing extremely rapidly. And so there’s this natural—cities are growing extremely rapidly. You saw this in China over the last 30 or 40 years, and now you’re seeing this occur in Africa now. So previously small cities are becoming these major metropolises. And it provides this opportunity because a lot of these cities are relatively poorly governed. They’re not even providing basic public goods such as effective roads, sewer, electricity, much less things like governance.
However, to be able to provide improved things like governance, you can imagine—so for example, in sub-Saharan Africa, the country that ranks highest on the World Bank Doing Business Index, which is an index that’s relatively similar to economic freedom, the country that ranks highest on the Doing Business Index ranks about 50. And so you can imagine if somebody creates a charter city that does a little bit better on the Doing Business Index, ranks 40, it suddenly becomes a magnet for every smart, for every entrepreneurial person in sub-Saharan Africa. And that would entirely change the dialogue on the continent to push towards more economic liberalization, towards freer markets, towards more trade, towards these things that can really help, I think, change the conversation and then help create some of the investment and some of the economic growth that can lead to the development that Africa so sorely needs right now.
A Humanitarian Approach to Markets [43:35]
Bob Zadek: Now, Mark, you and your colleagues are offering a proven, underlined proven, way to exit poverty on an staggeringly quick and effective level. And painless. It just create the environment for business to thrive. So you are selling something where you’re not selling a theory—or not selling, but you’re offering not a theory, but here it is. Look at all of these examples. What I don’t understand is the governance in parts of the world so mean-spirited, so ignorant, that they don’t see the obvious way out of poverty and don’t embrace it? What’s preventing hundreds of cities such as those in China, Hong Kong, Singapore—what’s preventing them from springing up? It’s a way out of poverty. Everybody wins except for the entrenched economic interests who lose their monopoly control.
Dr. Mark Lutter: Sure. I think that’s an important point. I believe charter cities and free cities are inevitable. And our goal as an organization is to help accelerate that because if we’re able to create them one year, two years, five years sooner, that’s people being lifted out of poverty that much sooner. And two, to try to push them in a good direction of not only greater economic liberalization, but greater political liberalization as well towards classical liberal ideals such as free speech, freedom of contract, freedom of association.
And as to why these projects aren’t happening, I think the primary constraint up until recently and still currently has been political. That I wouldn’t say the politics are any more mean-spirited there than in other countries. In the US, I mean, it doesn’t take much to see how mean-spirited politics can be in the US. And I think a lot of the people, the politicians or their advisors, to a certain extent understand the values and the ideas that I am professing. I think the challenge is, as you mentioned, right, there are these special interest groups that might come out against these projects, as well as the fact that this is a new idea. Singapore, Hong Kong are seen as anomalies. They’re in Asia, so the people in Africa don’t necessarily see them as a model that can be replicated in Africa.
And I think the idea has to be developed a little bit more such that—for example, I have a friend at the World Bank and he mentioned that there was a country in Africa that proposed creating a charter city to the World Bank. And the conversation at the World Bank was, “Okay, do they know what a charter city is or are they just using the right buzzwords?” And so right now, while I think on some of the concepts there is an agreement, the idea simply hasn’t penetrated enough minds, enough people, such that there’s still this challenge of coordination when you’re trying to bring together all of these different groups.
So for example, the classic Silicon Valley startup, you put three people, lock them in a basement, and after six months they have a minimum viable product. A charter city is much, much, much more complex than that. And so you need to bring together all of these different interest groups and they need to have the same conception of what a charter city is, what their role in the development of a charter city is. And to do that is challenging. And I think up until now the conversations have unfortunately been a little bit siloed. The people in Silicon Valley who are interested aren’t talking to economists, who aren’t talking to the humanitarians, who aren’t talking to the new city developers, who aren’t talking to the financiers, who aren’t talking to the politicians. And so there’s all these groups that have these interests that aren’t effectively communicating with each other. And our goal at the Center for Innovative Governance Research is to bring these groups together to be able to start the conversation that can lead to what we see as the necessary ingredients to make charter cities and free cities a success.
Closing and Contact Information [46:37]
Bob Zadek: What I find this discussion so interesting is that you are proposing at its core a government which does nothing other than encourage free market activities, protect the rule of law, honor contracts, give parties to a contract a peaceful way to resolve disputes. Basically, you’re advocating the core of essential government. But you are really proposing a massive humanitarian system. The ultimate goal is not, “Hey, we’ll all get rich.” The ultimate goal is we can sit around, have all this freedom, smoke pot and do what we want. That’s not what you’re proposing. At the core, you are this very ambitious, effective humanitarian, using as the vehicle to accomplish humanitarian goals, using the tool of free market. That’s what makes this—that’s what gives me goosebumps when I hear you talk.
Dr. Mark Lutter: Yeah, I completely agree. I think traditionally the humanitarian community is focused too much on aid and not enough on achieving sustainable policy reform that can lead to economic growth. And I think the beauty of charter cities, of free cities as a project, is unlike many social movements, once this idea takes off, it will replicate itself because there is this inherent profit motive in the idea. And so for example, the developers who build out the real estate infrastructure of a charter city, of a free city, will become very wealthy.
And because of that, because there is this body that has this interest in promoting this idea, I think once you basically get the ball rolling, then it’ll become effectively unstoppable. And so I see it as, yeah, it’s harnessing markets in the best way to alleviate poverty, as well as I think a very effective mechanism because unlike something where, for example, a food program where you have to give them money every year, you have to give them food every year, this is more like teaching a man to fish where once you set it up, then it has its own mechanism to continue and to sustain itself. And my goal is once this organization is up and running and once the community, the worldwide community of believers of people of the relevant parties of charter cities are really in communication, my goal is actually to move over to the for-profit side and to see what I can do there.
Bob Zadek: Now, Mark, we have one and a half minutes left. I’m going to give you 10 seconds to tell us about charter cities that have been blazing success stories under a socialist or communist model. You have 10 seconds for that. And please take the rest of the time telling our friends how they can follow your writings and your work.
Dr. Mark Lutter: Sure. So I think, I mean, it’s not exactly a charter city per se, but Estonia, right, it’s a small country that broke away from the Soviet Union after the collapse of the Soviet Union. They embraced markets. Their Prime Minister, the legend says that he had read one book on economics, which was Free to Choose by Milton Friedman. And since then, they’ve become an extremely successful country. They have an e-government system that is the envy of the world.
As to how you can follow me and my organization, our website is innovativegovernance.org. We have a Facebook page, we have a Twitter account, we have a newsletter. You can sign up for those. You can shoot me an email. My email is listed on the website. I’d be happy to keep in touch. We’re always looking for people to write for us. So if you’re interested in these ideas, please reach out and I’ll be happy to chat and see if we can get you involved in any of these projects in any way.
Bob Zadek: Mark, you’re doing God’s work. Thank you so much for all of the good work you’re doing. We appreciate giving us an hour of time this Sunday morning. This is Bob Zadek saying to all my friends out there, so long for now. I’ll speak to you again next Sunday.